You’ve finally decided it’s time to invest in digital currencies. One of the first things you need to do is create an account on a crypto trading platform so you can easily exchange your dollars, euros, or whatever currency you use in your corner of the world for digital assets. Crypto enthusiasts new to the whole crypto market might not know what they have to do. That’s why today, we’re tackling cryptocurrency exchanges and how they work.
What is a crypto exchange?
A cryptocurrency exchange is a platform where crypto traders can buy and sell crypto assets, exchanging one cryptocurrency for another, but also one can buy crypto using any type of fiat currency. They are divided into centralized and decentralized exchanges.
Centralized exchanges (CEX)
This type of exchange allows crypto investors to trade fiat for crypto (and vice versa) and crypto to crypto trading pairs. All the transactions are handled by the exchange itself, using the order book model, where the price of a particular crypto coin is based on the current buy and sell orders. In a centralized exchange, crypto transactions are recorded on the internal database.
Decentralized exchanges (DEX)
A decentralized exchange (DEX) is a peer-to-peer cryptocurrency marketplace where users trade crypto directly with each other. No third parties are involved like banks, brokers, or payment processors. DEX crypto exchange platforms don’t allow you to trade between fiat and crypto. You can only buy or sell digital currencies. Some of the best crypto exchanges you can use are Sushiswap and Uniswap, all part of the ever-expanding suite of decentralized finance (DeFi) tools that allow you to make these transactions directly from your crypto wallet.
How do decentralized cryptocurrency exchanges work?
DEXs use smart contracts that establish the price of different crypto tokens utilizing an algorithm. They also use liquidity pools, where active traders lock in funds to obtain additional rewards, as an easy way to facilitate trades. Transactions made on these trading platforms are recorded directly on the blockchain. DEXs ensure transparency as they are built on open-source code, allowing anyone to see how they work.
Benefits of using a DEX
Before you delve into cryptocurrency trading, let’s see what some of the main benefits of trading on a DEX are:
Ensured privacy - You are not required to offer any of your personal information in order to buy or sell cryptocurrency on most exchanges.
Wide variety of tokens - Most crypto exchanges have a limitless range of virtual coins to choose from. If you wish to trade Bitcoin or ETH for a less known hot token, DEXs are definitely the place to do it.
Less hacking risks - Crypto markets are not immune to hacks, but since deposit funds used in a DEX trade are stored on your own digital wallet, they are less likely to be hacked. However, you are solely responsible for your private keys and making sure nobody else gets access to them.
Possible risks
Unvetted coins have higher risks - Decentralized exchanges offer access to more tokens than other global crypto exchanges, but some of them are unvetted. Such coins pose a higher risk of scams and fraud schemes. If a new, less-known token has piqued your interest, take all the necessary precautions and security measures before investing. Read the whitepaper, search the crypto space for the project’s Twitter and Discord channels, and any available audits.
Complicated user interfaces - Advanced users will find navigating through a DEX’s interface easier. For people selling crypto for the first time, some caution is advised to avoid mistakes like sending the assets to the wrong wallet address.
Smart contract vulnerabilities - When creating a crypto exchange account, you should be aware that the smart contracts that power the DEX, although secure, are not fully uncompromisable. The code can have bugs that scammers will try to exploit to gain access to people’s coins, including yours. These events are rare, but it’s preferable you know of their existence.
Crypto exchange fees to take into account
As you can imagine, trading fees can vary from one platform to another. Some have a fixed fee structure of around 0.2%-0.3% for each transaction, while other exchanges have higher or lower fees depending on the trading volume. Ethereum network-based exchanges charge gas fees on top of that, which tend to amount to a pretty penny. High-volume traders should research properly before choosing a platform, preferably using one with low fees.
Once you’ve established what you want to do with your coins, you can look into the best cryptocurrency exchanges for your specific needs. Speak with advance traders or financial advisors that you know to get the hang of it, and start small before you go all in.
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